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Economies of Scale and Merger Efficiencies: Empirical Evidence from the Chilean Pension Funds Market

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Over the last twenty years there has been a deep concentration process in the Pension Fund Manager (AFPs) industry in Chile (from 21 firms in 1994 to only 6 in 2012). A major concern with the concentration of this industry is that firms might be able to exercise market power. However, significant efficiency gains could result from this concentration process, especially if there are economies of scale present in the industry. The welfare effect of a merger is, therefore, ambiguous. In this paper we estimate the welfare implications of a merger between two medium-sized AFPs in Chile. For this purpose, we estimate the size of the economies of scale in this industry and use the results to simulate the merger using a simple imperfect competition model. The estimations, based on quarterly financial information for the last 8 years of the Chilean Pension Funds system, show robustly the presence of significant economies of scale in operating costs. The merger simulation indicates that despite the cost savings, the merger would induce a small price increase. This effect reduces consumer welfare, but aggregate welfare increases because of the efficiency gains from the economies of scale. Since aggregate elasticity in this industry is zero (because affiliation is compulsory), the price increase does not generate any efficiency loss.

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Paper provided by Adolfo Ibáñez University, School of Government in its series Working Papers with number wp_027.

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Date of creation: Dec 2012
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Handle: RePEc:uai:wpaper:wp_027

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  1. Gaston Gelos & Jorge Roldos, 2002. "Consolidation and Market Structure in Emerging Market Banking Systems," IMF Working Papers 02/186, International Monetary Fund.
  2. Gianni De Nicoló & M. G. Zephirin & Philip F. Bartholomew & Jahanara Zaman, 2003. "Bank Consolidation, Internationalization and Conglomeration," IMF Working Papers 03/158, International Monetary Fund.
  3. McAfee, R Preston & Williams, Michael A, 1992. "Horizontal Mergers and Antitrust Policy," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 181-87, June.
  4. Joseph Farrell and Carl Shapiro., 1988. "Horizontal Mergers: An Equilibrium Analysis," Economics Working Papers 8880, University of California at Berkeley.
  5. James, Estelle & Edwards, Alejandra Cox & Iglesias, Augusto, 2009. "The impact of private participation and countervailing information on disability costs: evidence from Chile," Journal of Pension Economics and Finance, Cambridge University Press, vol. 8(03), pages 291-320, July.
  6. Oliver Budzinski & Isabel Ruhmer, 2009. "Merger Simulation in Competition Policy: A Survey," Working Papers 82/09, University of Southern Denmark, Department of Environmental and Business Economics.
  7. Claudio Agostini & Eduardo Saavedra & Manuel Willington, 2009. "Fusión Procompetitiva y Economías de escala en el Mercado de AFPs," ILADES-Georgetown University Working Papers inv238, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  8. Nicola Cetorelli & Beverly Hirtle & Donald Morgan & Stavros Peristiani & João Santos, 2007. "Trends in financial market concentration and their implications for market stability," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 33-51.
  9. Patricio Arrau & Rómulo Chumacero, 1998. "Tamaño de los Fondos de Pensiones en Chile y su Desempeño Financiero," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 35(105), pages 205-236.
  10. Werden, Gregory J & Froeb, Luke M, 1994. "The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 407-26, October.
  11. Roy J. Epstein & Daniel L. Rubinfeld, 2002. "Merger Simulation: A Simplified Approach with New Applications," Industrial Organization 0201002, EconWPA.
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